The growing link between Middle East insurers and the international markets means a more central role for ratings agencies. David Banks speaks to AM Best to discover what this will mean for the region.
As the distance between Middle East insurers and the international markets narrows, clients and brokers are all much more ratings-aware. Indeed, international ratings agencies are now among the most important influencers of strategy for insurers in the region.
Not only do ratings agencies deliver judgments on business competence and financials, but they also encourage risk management, transparency and an achievable strategy. The question now is: What further changes are ratings agencies likely to encourage in the year ahead?
Risk management is one clear area of potential improvement, as well as a structure in insurance and the wider business community that allows risk management to filter down to the grassroots.
A more tangible contribution, however, will come in the context of insurance supervision.
Anandi Nangy-Kotecha, managing senior financial analyst at AM Best, says her team will keep a eye on regulatory changes by SAMA in Saudi Arabia, as well as the Dubai International Financial Centre, the Qatar Financial Centre, the UAE Insurance Commission and others.
“The attempt from various jurisdictions to make significant improvements to their regulatory regimes is expected to impact the overall perception of the region. Many times, the level of stringency appears to be the main focus of some regulators with existing companies struggling to comply with new rules. Therefore, enforceability is the key issue for regulators and that can only be evaluated over time,” Nangy-Kotecha says.
She adds that quality of regulation and supervision are not always a booster to ratings on their own and can even be a drag to ratings.
Rating considerations coupled with assessment of a territory’s regulations could determine the choice of location for a foreign entity entering the market, Nangy-Kotecha reveals.
It could also dictate whether such a company decides to create a representative team, partner with an existing player or even form a more substantial regional operation.
“Launching a new company or investing in existing players largely depends on the entity’s circumstances and strategic plans. In both cases, AM Best will need to assess the impact on the entity’s capital position, market profile and presence, financial strategy, to see if there are any positive or negative consequences for the rated entity,” she says.
“In the case of a start up operation, there will be increased capital requirements as there is no track record on which to base an opinion.”
Ratings agencies can also be expected to play a greater role in enhancing companies’ market reputation. Mahesh Mistry, financial analyst at AM Best, says: “There are many established entities in the GCC markets at present, so it is important to understand the start-up operator’s ability to penetrate the targeted markets.”
The current financial turmoil has shown the extent to which the market is globalised, as GCC economies experience a lack of liquidity. “This combined with a decline in oil prices will lead to a lower regional growth notwithstanding the wealth accumulated in the past.”
However, Mistry adds: “It is precisely this wealth and the number of ventures the sovereign funds are involved in that keep the GCC in relatively better shape to face this crisis compared to the US or Europe.”